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What's a Virtual Power Plant? Should You Join One?

Virtual power plants are one answer to some of the challenges posed by the clean energy transition.

Increasingly, some services provided by power plants are coming from devices in private homes.
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In any given region, electricity demand isn't constant: It's generally lowest at night and highest on hot days when air conditioners are working their hardest. But utilities need to be ready to meet those moments of peak demand -- or risk a blackout or brownout, a drop in voltage that can harm some electrical devices.

To meet peaks, utilities often ramp up energy production, usually with "peaker plants" or by purchasing electricity from another provider. These can be expensive and dirtier solutions, releasing more greenhouse gas emissions than regular operation.

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This rendering shows one possible setup of batteries and an electric vehicle charger, both of which could be enrolled in some virtual power plants.

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Virtual power plants offer an alternative that's often cheaper and greener for utilities and can even make you, the consumer, a bit of extra money.

The problem of peaks

The grid goes down if the supply of electricity doesn't meet its demand. That means the grid needs to ramp up supply to power every HVAC and television when everyone gets home from work at the same time.

To meet these peaks, utilities might have to buy energy at a premium on the open market, according to the nonprofit energy consulting firm Advanced Energy. Utilities might propose building a new power plant, like the over 1,000 so-called peaker plants in operation across the United States -- according to the Clean Energy Group, a nonprofit that advocates for phasing out peaker plants as part of a larger push toward greater clean energy adoption. The plants run only intermittently and typically on fossil fuels.

Peaker plant owners are paid to generate electricity but are also paid to be available to utilities as needed. As a result, electricity from peaker plants is more expensive: A 2020 report found that peak electricity in New York City was 1,300% more expensive than the average cost of electricity in the city. (Peak electricity in New York City is also some of the most expensive in the country, the report says.)

Besides climate warming emissions, fossil fuel peaker plants also pollute the air with nitrogen oxides, sulfur dioxide and particulate matter that can harm the respiratory system and cause asthma. For these reasons and others, some utilities are trying out alternatives to meeting peak demand. 

Meeting peaks with virtual power plants

Virtual power plants, or VPPs, group together smart thermostats, air conditioners, batteries and other home devices to supply energy to the grid and reduce the electricity needed. The goal is lowering peak demand by cutting back home electricity use or meeting the peaks by drawing electricity from home storage batteries. 

VPPs can take different forms, but simple hypothetical examples might look like this.

  • A utility contracts with a third party company to meet peak demand throughout the year. That company gets the utility's customers to give it limited control over their smart thermostats. The customers agree that, given 24 hours notice, the company can raise their thermostat setting a few degrees Fahrenheit (or Celsius) during a certain number of that year's hottest days. In return for giving up some control over their thermostat, the customer requires less energy for their air conditioner and gets paid for helping reduce demand.
  • A utility pays customers to give up some control of their home battery. During peak events and given a day's notice, the utility can feed a certain amount of energy from your battery back into the grid to meet the higher demand. Batteries raise supply rather than reduce demand, but the end result is the same: Customers who enroll their batteries receive a cash incentive.

Vermont utility Green Mountain Power operates a virtual power plant that's been a success. In 2017, the utility partnered with Tesla to subsidize Powerwall batteries for its customers. Customers got a more affordable source of backup electricity in case of a power outage. The utility got a source of stored power they could draw from during peak demand days. The program has changed over time. In the current iteration, 500 customers each year can lease two Powerwall batteries for 10 years at $55 a month or for a one-time $5,500 payment. (A Powerwall retails for $10,500 from Tesla.)

Green Mountain Power also operates a bring-your-own-device program. Customers can enroll a certain amount of energy from batteries for cash. For every kilowatt of energy storage enrolled, the utility will give a customer $850 if they allow it to be discharged for three hours; it's $950 for four hours. In locations with high need, they'll tack on another $100 (so that's $950 and $1,050, respectively). Customers agree to use the battery only for backing up their home in the case of a power outage.

Green Mountain Power claims these payments are the highest of any utility in the US, so you might expect a bit less from your local utility. The programs have enrolled roughly 4,000 customers and about 18 megawatts of energy storage in small batteries, said Josh Castongua, the chief innovation officer and a vice president at Green Mountain Power. It also enrolls other smart devices and personal EV chargers so it can shift car charging away from peak hours.

According to the utility, it saved $3 million in energy peaks in 2020 thanks in part to its VPP efforts. Castonguay said that money reduces "rate pressure" for the utility, allowing it to keep rates lower than they would otherwise be.

According to the U.S. Energy Information Administration, the average residential electricity rate in New England was 22.04 cents per kilowatt. In Vermont, it was 19.60 cents per kilowatt. Green Mountain Power's residential rate was 18.06 cents per kilowatt. 

Is joining a VPP a good idea?

"I do think it's a no-brainer if you have this kind of device," said Ben Hertz-Shargel, the global head of grid edge for the consulting firm Wood Mackenzie. "When devices just do their own thing, they're not reaching their full potential."

Smart thermostats and other devices are pitched as money savers. You don't get the full value of them if they're not also making you money.

Reaching stated climate goals will require both smart demand devices and batteries coordinated to respond to what the centralized grid needs, Hertz-Shargel said. Joining a VPP can help move the grid closer to that. A more nimble grid, utilizing distributed resources like smart thermostats and home batteries, might be able to replace the peaker plants that can harm the climate and human health.

Green Mountain Power retired a peaker plant last summer: It's currently decommissioning the two diesel generators that provided 4 megawatts of peak demand. The utility's ability to call on home energy storage was partially responsible, Castonguay said.

The trade-off for enrolling in a VPP is usually in flexibility, Hertz-Shargel said. ("I wouldn't call it a downside," he said. "It's just the other side of the equation.")

Members of Green Mountain Power's VPP have to agree to only use their battery for backup power. They can't use it to take advantage of time-of-use rates or use energy from a rooftop solar array at night. If you enroll a smart thermostat, you agree to be a couple of degrees warmer on some days. 

VPPs have room to grow. Of the home storage installed, Hertz-Shargel said only 12% is aggregated in a VPP. The United States continues to install record-setting amounts of residential energy storage.

If you want to enroll your batteries, electric vehicle charger, smart thermostat or other device in a VPP and there isn't one in your area, you can always reach out to your utility to let them know you're interested, Hertz-Shargel said.

Meanwhile VPP programs, at least at Green Mountain Power, will continue to grow.

"Ultimately, we're looking to get storage in every single home," Castonguay said.